What is Friendly Fraud?

Friendly Fraud May Cost Businesses More than $30 Billion in 2019

The average eCommerce merchant would assume most chargebacks as the products of criminal fraud attacks. In reality, fewer than 10% of all chargebacks are tied to a criminal fraud attack. The majority result from a practice known as “friendly fraud.”

Friendly Fraud: Defined

Friendly fraud occurs when a customer wants to undo a transaction, and files a chargeback instead of contacting the merchant for a refund. The cardholder essentially contacts the bank, claiming a valid transaction is actually not valid.

Friendly fraud should be distinguished from more malicious criminal fraud tactics like account takeover or fast fraud. It’s also different from so-called “cyber shoplifting,” which involves a customer who makes a purchase, already planning to dispute the charge, as a way to get something for free.

Friendly fraud, on the other hand, could be a well-intentioned customer who simply doesn’t understand the chargeback process. Maybe the person wants a refund and doesn’t understand the difference, or the cardholder simply inquires about a transaction, and the bank files a dispute on the person’s behalf.

Regardless of intent, though, the result is the same: the cardholder files a dispute, while the merchant loses the sales revenue, the merchandise, and pay added fees to cover the cost of chargeback administration.

Why Do Cardholders Commit Friendly Fraud?

Some of the most common claims attached to friendly fraud disputes include:

• The goods ordered never arrived.
• The item was not as described.
• The merchant failed to cancel a recurring payment as per customer request.
• The transaction was never authorized.

Any of the above cases seem plausible, and that’s exactly how friendly fraud operates. Once the customer makes a claim, the burden of proof falls to the merchant to refute it.

Merchants need to provide compelling evidence to initiate the representment process and overturn a chargeback. This entails compiling evidence and submitting it to the issuer for review, which is difficult and time-consuming, even with efficient recordkeeping. Even with all that work, there’s no guarantee of success.

How Big a Problem is Friendly Fraud?

Friendly fraud is one of the greatest threats facing the eCommerce environment. Friendly fraud losses increase by roughly 41% every two years, meaning the practice could cost businesses as much as $33 billion by the end of 2019.

There are a few reasons why friendly fraud is becoming such a problem:

• More Online Shopping: Simply put, increased volume in online shopping means increased chargeback volume.
• Outdated Chargeback Processes: Chargebacks were introduced in the 1970s and have not changed much in response to the development of eCommerce.
• Convenience: Customers want a quick resolution and will choose whatever option they believe is likely to produce it, whether that’s a merchant return or a chargeback.
• Lack of Due Diligence: Banks have an incentive to keep their customers happy. This produces a situation where banks are incentivized to rule disputes in the customers’ favor.
• Merchants’ Rights are Limited: Sellers are considered “guilty until proven innocent.” Merchants are fighting an uphill battle with limited insight, data, and time.

It’s easy for cardholders to file a chargeback, however, it’s difficult for merchants to fight back. This creates a kind of chargeback-feedback loop. Cardholders file more friendly fraud chargebacks, thus giving merchants less time and fewer resources to address each dispute. The result: friendly fraud is easier to get away with, incentivizing customers to file more chargebacks.

It’s no wonder 40-50% of cardholders who commit friendly fraud will do it again within 90 days.

What Can Merchants Do?

The situation is dire…but it’s definitely not hopeless. Merchants can adopt the following practices to minimize their exposure to friendly fraud:

• Notify customers before charging a rebill.
• Ensure all billing descriptors are clear and recognizable.
• Provide tracking and delivery confirmation for every order.
• Maintain clear, organized, and easily-accessible transaction records.
• Maintain open lines of communication and customer service.
• Make the refund process as straightforward and frictionless as possible.
• Work with a chargeback mitigation service to recover revenue.

Of course, there’s no foolproof way to prevent friendly fraud. Your best bet is to adopt the above-mentioned behaviors, and ensure business best practices are adhered to wherever possible.